The relationship between the provincial governments and the central government in Iraq is complex; the issues are sensitive and go to the core insecurities of each of the major political factions in Iraq. Iraq lacks a traditional of local and provincial governance and this has impaired efforts to facilitate “bottom-up” reconciliation. Furthermore, previous electoral boycotts have limited the participation of the Sunni Arab community in provincial governments. This is expected to change in the next round of provincial elections, which are scheduled for October 2008.

The coming implementation of a law regulating the creation of semi-autonomous regions will likely exacerbate the insecurities of the Sunni Arab community as it is expected that this will further decentralize the Iraqi government. Because the majority of Iraq's petroleum and natural gas deposits are located in the areas associated with the Kurdish and Shi'a Arab populations, many Sunni Arabs fear that the creation of semi-autonomous regions will mean that they do not get an equitable share of Iraq's oil wealth. This fear is exacerbated by the fact that the central government has failed to pass and implement legislation on the distribution of hydro-carbon revenues.

Provincial Government Capacity

Although constitutionally a federal state, Iraq's history of centralized government has left it without a tradition of local and provincial governance. One of the key tasks of the Provincial Reconstruction Teams and the associated Local Governance Program run by USAID has been to develop governmental capacity at the provincial level. To that end, local Iraqis receive training in running provincial council meetings, managing provincial government staff, and drafting, executing, and monitoring provincial budgets. Building these capacities is important in enabling the Iraqi government to deliver public goods to the people at the local and provincial level. It is hoped that this will foster “bottom-up reconciliation,” whereby people who were sympathetic to the insurgency  or else sitting the fence side come to terms with local governments. This is different from "top-down reconciliation," which involves major political deals at the national level.

Provincial Elections and Authorities

Because of electoral boycotts, the Sunni community is substantially underrepresented on provincial councils. In order to incorporate the Sunni community into the political process, and give them an opportunity for redress of grievances without resorting to violence, there must be new elections at the provincial level. This was a priority for both the Embassy and for the Provincial Reconstruction Teams. The Government of Iraq established an Independent High Electoral Commission, with technical assistance from the United Nations Assistance Mission for Iraq (UNAMI) and the United States. The Iraqi government passed a provincial elections law to govern the election procedures and has decided to hold elections in October 2008.

Additionally, although the Council of Representatives has considered several draft laws delineating provincial government authorities, it has yet to adopt a final draft. This is critical because while many of the powers of the semi-autonomous regions and the provinces are outlined in the Constitution, the Constitution also requires implementing legislation with respect to critical issues like independent provincial finance.

Creation of Semi-Autonomous Regions

The Government of Iraq has passed a law regarding the creation of semi-autonomous regional governments; the Constitution recognized the existence of one such government already in the Kurdish region (KRG).  The creation of a semi-autonomous region in the Shi’a south has been a priority for the Islamic Supreme Council in Iraq (ISCI) led by Abd al-Aziz al-Hakim and it has been fiercely opposed by the Sunni community as well as “nationalist” Shi’a like Muqtada al-Sadr. Passed by the Council of Representatives in October 2006, the implementation of the law was delayed eighteen months. While the delay in implementation has reduced the friction on this issue, it is likely that it will once again become salient once the law is implemented in April 2008.

The creation of semi-autonomous regions is particularly significant in security terms because regions are constitutionally guaranteed the power to raise and control internal security forces. Provinces do not have this power. A decision to create a semi-autonomous region could therefore have significant effect on the country's internal political power balance as well as Iraq's security environment.

Distribution of Hydro-carbon Revenues

The Iraqi constitution calls for implementing legislation concerning the distribution of revenues from hydrocarbon resources, which are considered the property of the Iraqi people. This legislation is crucial to defining the relationship between the central government and the provinces, especially if it provides mechanisms for credible commitments by the Kurdish and Shi'a blocs to continue sharing oil revenue in the absence of US pressure. The passage of legislation of the distribution of oil revenues has also been delayed in the Council of Representatives for some time; passage of this legislation has lagged behind progress on holding provincial elections and defining provincial authorities.